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Mohamed A. El-Erian

Don’t Read Too Much Into Stocks’ Sudden Rebound

Investors should maintain caution instead of rushing back into risk.

Prudence still required.

Prudence still required.

Photographer: Michael Nagle/Bloomberg

It’s hard to believe, but in just more than a month, U.S. stocks, as measured by the Dow Jones Industrial Average, a widely followed albeit partial and imperfect proxy, have gone from a record high to the fastest correction in history to the best week since 1938. Driving these moves to a great extent were the contrasting investor sentiments of complacency at first and then panic. If you can correctly characterize the week’s strong rally, you hold the key to what lies ahead.

The Dow hit its record on Feb. 12 despite mounting evidence that the coronavirus was already damaging the global economy. China’s economy, the world’s second largest, had been brought to a virtual standstill. Global supply lines had been disrupted, causing some factories elsewhere to close. International trade was falling. And the source of all this, the highly contagious Covid-19 virus, was already spreading to other countries.